On October 1, 2008, Medicare implemented a policy that denies incremental payment for eight preventable complications of medical care. Even though this CMS policy is limited in terms of involved conditions, hospital reaction may be substantial because this policy change is viewed by many as the first in a series of CMS payment reforms intended to increase its emphasis on value-based purchasing, using both positive incentives and negative penalties. Hospital responses are likely to be more significant than they would be if the rule change was an isolated event rather than a precursor of future change. In addition, the negative 'stick' of non-reimbursement may be a more powerful motivator than an equal positive reward, in part because of revenue loss but also because of the negative stigma that results for an organization. We propose to examine the impact of Medicare's new nonpayment rule on hospital behavior related to four of the eight conditions identified by CMS as preventable: catheter-associated urinary tract infection rates, central line- associated blood stream infection rates, falls, and hospital-acquired pressure ulcers. We will also assess how hospital responses may vary depending on particular circumstances, such as financial health and market conditions. Specifically, we propose to address the following research questions: (1) What is the impact of the CMS payment rule change on the incidence of these four conditions? (2) How will hospital circumstances influence responses to the CMS payment rule changes? And (3) How have hospitals altered their quality improvement activities (QI) in response to the CMS payment rule changes? National Database of Nursing Quality Indicators (NDNQI) data merged with American Hospital Association Annual Survey of Hospitals data, Medicare Cost Reports, and Area Resource File data will be used to examine hospital responses to the CMS payment change using multi-level, interrupted time series models in which unit, hospital and market characteristics influence patient outcomes. Six hospitals with varying levels of outcomes improvement will be also be selected for in-depth site visits, focusing on the changes in quality improvement activities that have occurred as a result of the CMS payment policy, as well as the barriers and facilitators to change. Because of the relative novelty of negative incentives, as well as the signal that the rule change sends to hospitals about future Medicare payment changes, our study will provide vital information to policymakers and payers across the country about the extent to which such policies achieve intended results. We will also provide important information on how responses may vary depending on particular hospital circumstances, such as financial health and market conditions. Hospitals in poor financial health may lose more under the new payment rules, adding to their problems in supporting quality improvement activities. In these turbulent financial times, it is critical that payment incentives designed to improve quality of care do not have unintended effects that compromise quality due to the financial pressure they create.